Sightline Weekly Market Update: Is Inflation Poised to Slow?
The inflation and first-quarter earnings results were the most closely watched of the data investors had to digest at the end of the holiday-shortened week. Equity markets finished the week mixed with large caps giving ground to small caps and value stocks outperforming growth. In the week, the TSX drifted slightly lower, losing ten basis points, the Dow Jones lost 78 basis points, the S&P500 gave up 2.13%, the Nasdaq dropped 2.63%, whereas the S&P MidCap 400 and the Russell both held up with gains of 44 and 52 basis points respectively. Oil moved back over $100 per barrel to finish the week at $106.38, an increase of 8.30% in the week. European stocks responded positively to comments from European Central Bank President Christine Lagarde indicating, based on the latest economic data, that a steady removal of asset purchases would end by the third quarter. Further, she said, there were no immediate plans to raise rates after the asset purchase program concluded. The pan-Europe STOXX Europe 600 Index gained 1.09%, while all the major continental indexes rose in the week. The exception was the UK, which fell 0.79% on a stronger pound, hurting multinational companies’ earnings with earnings overseas.
Earlier in the week, the Chicago Fed President Charles Evans suggested a 0.50% rate hike at the next Fed meeting in May was highly likely. He felt the 0.50% hike was the correct path and necessary for a more normal Fed funds rate in a range between 2.25% and 2.5% by December.1
Last Tuesday, the US Bureau of Labor Statistics released the latest reading for inflation. The Consumer Price Index increased 1.2% in March, seasonally adjusted after a 0.8 increase in February. The index increased 8.5% for the year ending, a 40-year high. Gasoline rising 18.3% in March accounted for over half of the All Items index. The index for all items excluding food and energy (the core index) rose 0.3% in March after a 0.5% increase in February. The lowest in six months, the latest core reading gave rise to speculation that inflation could be topping. Core inflation is more closely watched by the Fed and is considered a more accurate reading of inflationary trends. While lower at 6.5%, the core rate is still at a 40-year high. If oil were to stabilize soon and supply shortages ease, economists are suggesting that inflation could slow in the coming months.2
On Wednesday, the BLS reported the producer price index, which measures the prices paid by wholesalers, increased by 1.4% in March, rising 11.2% year-over-year, the largest increase since the data was first calculated in November 2010. The PPI is considered a forward-looking inflation measure because it tracks prices for goods and services eventually passed on to the consumers. The core PPI (ex-energy, food and trade services) rose 0.9% in March, bringing the year-to-date to 7%.3
According to FactSet, through April 7, 20 companies (4% of the S&P 500) have reported Q1 earnings. The current expectation is for single-digit earnings growth, with companies discussing factors having negative impacts on earnings. The highest number of companies cited labor costs and material shortages impacting earnings in conference calls. Despite the negative effects mentioned by those 20 reporting companies, they reported aggregate earnings growth (year-over-year) of 18.5%. Companies say they have pushed the additional labor and materials costs to the consumers.4
In other data releases, the initial unemployment claims were 185,000, an increase of 18,000 from the previous week. The number of claims for benefits from all programs for the week ending March 26 was 1,703,298, decreasing from 19,733.5 Also, the Bank of Canada increased its overnight rate by 0.50% to 1% and stated it would end all reinvestment and begin quantitative tightening beginning April 25. 6
As we move forward, investors’ concerns and sentiment will continue to be driven by inflation news influenced in part by the Ukrainian situation, labor and material shortages; supply chain disruptions, especially if the largest port in the world, Shanghai, remains in lockdown; the constant threat of war between the West and Russia; and rising interest rates which will eventually lead to an economic slowdown. On a positive note, several sectors are surprisingly resilient, generating record profits in what could be described as a challenging economic environment.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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